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Minyanville's T3 Daily Recap: Halloween Sell-Off Can't Spoil Best October in Decades


We just had a 14-16% move off the lows during the course of October.

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The S&P dropped 2.5% to finish October, but the bulls aren't complaining. The first trading day of the month started with an open below range lows, but that day ended in a pivotal reversal that set the stage for a ferocious bounce. The S&P and Nasdaq ended the month with an 11% gain. The Nasdaq pushed to within a stone's throw away from 52 week highs late last week, while the S&P briefly reclaimed its 200-day MA before dipping back below today.

Europe has been driving force for the market, especially over the last two months as Greece teetered on the brink of default. News of a possible rescue plan on October 4th ignited the rally, and last week European officials were finally able to hammer out a deal that should give the region at least a breather from the sovereign debt crisis. Today however, as the euphoria subsided, investors started to question whether the plan would be enough to put the crisis to bed.

Technical Take

Let's put the market in perspective. We just had a 14-16% move off the lows during the course of October. Some leading stocks have moved 15-40%. Today's drop was not the greatest thing in the world for bulls, but it is to be expected given the trajectory of the rally.

Markets are considered very strong when they hold their 32.8% Fibonacci retracement levels. This rally has been holding its 25% retracement area during each leg higher, foreshadowing much higher prices ahead, and quickly. Right now, that 25% retracement zone stands around $124 on SPY, and we will be watching that level tomorrow. On the S&P Index that level is 1238-1242. The 38.2% retracement on the SPY is $121, and 1209-1212 in the S&P.

It feels like during the last month a lot of people wanted to wait to buy the pull back. However, the pull backs were very shallow, and you had to be aggressive to get involved. Now everyone is wondering where they can confidently buy.

I would say that Mr. Market is due to shake the tree a little bit before the next leg higher. You always want to be prepared to buy dips, but being early can hurt. Be patient right now, and a great opportunity will surface.

I wrote a note Friday saying it would be a bit disrespectful to run this market even higher into the two-day Fed meeting. Big Ben might not be as accommodating after a big run! Maybe today's action will make sure he maintains his dovish tone.

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Scott Redler is short SPY. Today he traded (long) TZOO, LNKD, AAPL, and GOOG, but is currently flat those positions.
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